On June 4, 2020, at the heart of the first confinement, the French State put ten-year Treasury bonds on the market. Yield obtained: 0.02%. That is an interest rate of almost zero. The era of free money was in full swing. Borrowing cost the French government next to nothing.
A little over two years later, the situation has completely changed. On October 6, Agence France Trésor issued new ten-year Treasury bonds… but this time at 2.59%. France is not – far from it – on the verge of a financing problem, but for the first time in thirty years, conditions are getting tougher.
“We are changing economic era, notes Gilles Moëc, chief economist of the Axa insurance group. After the great moderation of the 2000s, then the financial crisis of 2008 which broke inflation, we have the impression of returning to the 1990s. A decade marked by numerous currency crises, the ever-increasing burden of debt servicing and economic instability. Others rather make the comparison with the 1970s: energy crisis, rampant inflation, geopolitical tensions…
No matter how far back in time we go: the conclusion is the same. In one year, the Western world has undergone a major economic shift with the great return of inflation. To cope with this shock, central banks began to raise their rates at high speed, after decades of structural decline. Since the start of the year, the US Federal Reserve (Fed) has raised its key rate from 0% to 3%, and the Bank of England from 0.1% to 2.25%. Even the European Central Bank (ECB), where the deposit rate had plunged to -0.5%, got into it. On Thursday, October 27, it should announce a further rise in its rate, probably by 0.75 points, to 1.5%.
New era
“We are returning to a world of slightly more normal interest rates and this will have serious consequences for the debt accumulated throughout the world”, underlines Mervyn King, former Governor of the Bank of England (2003-2013). Because during the decades of ever lower interest rates, States, but also businesses and households, reacted in a perfectly rational way: they got into more and more debt. In 1970, total world debt (states, companies and households) slightly exceeded 100% of gross domestic product (GDP); in 2007, it was close to 200%; today it exceeds 250%. Or 226,000 billion dollars (231,000 billion euros), according to calculations by the International Monetary Fund.
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